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Netflix Q3 Preview: The Calm Before the Streaming-Wars Storm?

Wall Street is expecting Netflix to hit or slightly beat subscriber and financial targets when it reports third quarter 2019 results on Wednesday after market close.

But then what? Debate among analysts continues to rage about what will happen to Netflix’s market-leading position once it’s facing big new rivals in Disney Plus and Apple TV Plus later in the year, and then WarnerMedia’s HBO Max and NBCUniversal’s Peacock in 2020.

For Q3, Netflix has projected global subscriber net adds of 7.0 million (6.2 million internationally and 800,000 U.S.). The Street is forecasting Netflix to report revenue of $5.25 billion, up 31% year over year, and earnings per share of $1.04.

The company fell far short of subscriber forecasts for Q2, posting its first net U.S. customer decline since 2011 and netting 2.7 million worldwide (vs. the 5 million it had projected).

Analysts believe Netflix will hit the Q3 numbers after the previous quarter’s miss. Netflix execs blamed the Q2 “choppiness” in the subscriber numbers on a weaker content lineup, while price hikes in the U.S. and other markets also affected the results. The content lineup going into the second half of 2019 is more robust, analysts say: During the September quarter, Netflix released about 720 hours of original programming in the U.S., up 7% year over year, per Cowen & Co. estimates. That included the return of popular series “Stranger Things” Season 3 and “Orange Is the New Black” Season 7.

But for Q4 and beyond, there’s no real consensus at this point about what Disney Plus, Apple TV Plus and other new entrants mean for Netflix’s business.

Two schools of thought have emerged: In one, there’s room for many winners in the over-the-top subscription video game; in the other, the sentiment is that Netflix will definitely feel the pinch of deep-pocketed new competitors.

Cowen & Co. analyst John Blackledge falls into the former camp. “Our view is that Disney+ is not a substitute for Netflix’s breadth/depth of content, and we also believe video is not a zero-sum game, with several winners poised to benefit from burgeoning [worldwide] streaming trends even as NFLX remains years ahead of competitors,” he wrote in a research note last week.

Indeed, the notion that new OTT products will run Netflix off the road is unfounded, according to BMO Securities’ Dan Salmon.

“The ‘streaming wars’ narrative is false,” he wrote in an Oct. 13 note. Rather, “the primary loser remains traditional pay-TV and the basic bundle in the domestic market, while most emerging markets remain in early-adoption phase” vis-a-vis streaming.

For Q4 2019, Blackledge doesn’t predict the Netflix train slowing down, estimating 2.02 million U.S. paid net adds (vs. 1.53 million a year prior) and international paid net streaming sub adds of 7.30 million (vs. 7.31 million). “We continue to believe that Netflix has pricing power due of high levels of established pay TV spending in the U.S. already (transitioning out of the fat bundle) and consistent quality of content,” he wrote.

While Disney Plus ($6.99 per month) and Apple TV Plus ($4.99 monthly) are launching at lower price points than Netflix — which runs $12.99 per month for the standard two-HD stream plan — both will have much smaller libraries of content. Others point out that Netflix has successfully continued to grow despite Hulu’s $5.99 monthly baseline pricing while Amazon throws in Prime Video for free with its free-shipping program.

“Consumers look at price/value – not relative to other services, because the content you want on Netflix is not available on those other services,” LightShed Partners’ Rich Greenfield wrote in an Oct. 11 note initiating Netflix coverage with a “buy” rating and a $375 per share 12-month price target.

Research has found that people are willing to pay for multiple services, although there’s obviously a limit. A new study by research firm Magid, fielded in May 2019, found that consumers are willing to subscribe to an average of four streaming services, down from six streaming services in 2018. However, Magid also found that consumers are willing to spend $42 per month on streaming services — up from $36 in 2018.

But as the streaming market grows more crowded, Netflix will likely see a decline, according to MoffettNathanson principal analyst Michael Nathanson.

MoffettNathanson enlisted research firm HarrisX for a survey of 18,746 respondents between July-September 2019 about the U.S. SVOD landscape. For Q3, Netflix maintained the top spot — with 74% of all streaming consumers using Netflix, vs. 47% for Amazon Prime Video and 35% for Hulu.

In Q4, however, with the launch of Disney Plus and Apple TV Plus, “we expect the positive engagement trends at Netflix and Prime Video to reverse,” Nathanson wrote. And as more SVOD and ad-supported VOD products enter the market, specifically HBO Max and Peacock in 2020, “we would argue that all services will be under pressure to either invest more in their content and services or come to grips with their limited long-run [total addressable market] potential.”

Along the same lines, Wedbush Securities analyst Michael Pachter believes Netflix’s Q3 guidance “is easily attainable,” but he also argues that Disney Plus will make a dent on Netflix. “The launch of Disney+ on Nov. 12 and the impending loss of most Disney and Fox content could cost Netflix another 25% of total viewing hours,” Pachter, a long-time bear on the stock, wrote in a research note.

Currently, content from Disney/Fox, Comcast/NBCUniversal, and Warner Bros. accounts for 60%-65% of Netflix viewing hours, per Pachter’s estimate. Most of that will ultimately migrate off Netflix, calling into question whether the current streaming leader can retain customers. That said, Netflix will likely “pay whatever it takes to attract high-quality content,” according to Pachter. He added that he thinks competitors will be slow to gain scale, giving Netflix the edge as the incumbent through the end of 2021.

“For now,” Pachter wrote, “Netflix provides tremendous value for its subscribers.”

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